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APRA Executive General Manager Policy and Advice Division, Pat Brennan - Speech to the COBA 2018: The challenge of change

Monday 22 October 2018

BEARs and CUBs

Pat Brennan, Executive General Manager Policy and Advice Division - COBA 2018: The challenge of change, Melbourne

Thank you Kate. I would like to thank COBA for inviting APRA to present at your annual conference once again. It is a valued opportunity to address such a significant part of the ADI industry in a single forum. 
Today I will talk about the Banking Executive Accountability Regime – commonly known as BEAR – and specifically how APRA expects ADIs to implement and maintain the regime. Speaking to an audience of credit unions and building societies (or CUBs), I anticipate there will be questions from the floor, and I will allow time to address these after making a few comments.
The Banking Executive Accountability Regime legislation was passed by Parliament in February 2018. It came into effect for large ADIs (the major banks) on 1 July, and will come into effect for all other ADIs on 1 July 2019.
The BEAR will drive improved prudential outcomes in the ADI industry by establishing clear and heightened expectations of accountability for directors and senior executives, and for the ADIs as well. I am sure we would all agree that clear lines of accountability are fundamental to any institution in establishing and maintaining good governance and a strong risk culture.
Implementing BEAR is an opportunity to genuinely strengthen accountability and improve governance. This is relevant for all ADIs, regardless of size and complexity, as driving improved outcomes is good for customers (especially depositors), good for boards, and good for ADIs generally.
Improving governance and outcomes is clearly very welcome, but that alone cannot guarantee that poor outcomes will not occur, and again this is a relevant consideration for all ADIs. So the BEAR also has sanctions, and they apply at two levels – for the individual and for the ADI. In the case of an individual failing to meet their accountability obligations under the legislation, APRA can disqualify them – that is to remove them from their role. Should an ADI fail to meet its obligations, APRA can approach the courts to apply a pecuniary civil penalty. The size of the potential penalty is proportionate to the size of the ADI.
Last week APRA released an Information Paper, Implementing the Banking Executive Accountability Regime[1], which is designed to provide both conceptual and practical assistance for ADIs to meet the obligations of BEAR. The paper steps through the key elements of the regime and offers explanations and clarifications based on our experience with the initial phase of implementation. The Information Paper, along with the relevant legislation (Part IIAA of the Banking Act 1959) and the accompanying Revised Explanatory Memorandum, are essential reading for those who will implement and maintain the BEAR.
The Information Paper focuses on implementation of the BEAR, and APRA will be releasing additional information on enforcement of the regime in due course.

What are the accountability obligations under BEAR?

In a general sense, the obligations of both an ADI and its accountable persons are to:
  • act with honesty and integrity;
  • act with due skill, care and diligence;
  • deal with APRA in an open, constructive and cooperative way; and
  • take steps to prevent matters arising that would adversely affect the ADI’s prudential standing or prudential reputation.
In addition, an ADI is required to take reasonable steps to ensure its accountable persons meet their accountability obligations. So you can see BEAR is founded on prudential matters, hence APRA’s role in administering the regime.

Who is an accountable person?

Accountable persons are typically the directors and senior executives of an ADI. This captures both the individuals who have actual or effective senior executive responsibility for management or control of the ADI, and those who hold certain responsibilities stipulated in the legislation. These are significant areas of responsibility, such as oversight as a board member, risk management, compliance, and managing the financial resources of an ADI.
That is not to suggest a separate accountable person needs to be identified for each of these areas of responsibility noted in legislation – not at all – a single accountable person may have a number of areas of responsibility.
What the BEAR does require is that:
  • ADIs identify who is accountable for each of the specified areas, and those who  meet the broad “actual or effective control” provision, and registers them with APRA;
  • each accountable person has an accountability statement describing their areas of responsibility, which is provided to APRA; and
  • each ADI has an accountability map showing lines of reporting and responsibility, which is also provided to APRA.
It is important that each of these elements reflects how the ADI actually manages and governs itself, and covers all operations of the ADI. Therefore there is no “correct” number of accountable persons – it is dependent on the size and complexity of the ADI, and how the ADI manages and governs itself. For the major banks, a number above 20 was found to be appropriate to cover the ADI group, and so for small ADIs the number is likely to be considerably lower.
Here you can see, at the centre of identifying and documenting accountability, there is proportionality in the regime; it is not a case of “one size fits all”. The clearer the starting point on accountability, consistent with good governance and a strong risk culture, the more straightforward implementing BEAR will be.

What does APRA expect of accountability statements?

An accountability statement needs to be a clear articulation of what an individual is accountable for in practice, and the outcome expected of each responsibility. Given BEAR is a prudential regime, particular attention may be given to the allocation of key functions of prudential significance, including accountability for the management of prudential risks with respect to those responsibilities.
A clear articulation of accountability relies on clarity of wording, so vague or non-specific descriptions are best avoided. A focus on the outcome expected can be helpful to sharpen the language and improve the clarity of an accountability statement.
These statements will generally reflect individual accountability, and whilst joint accountability is recognised in the BEAR regime, in practice areas of presumed joint accountability can often be found to be suitably distinct through the process of preparing clearly articulated accountability statements. Where joint accountability genuinely exists, however, this should be explicitly identified and defined.
When considered collectively, the statements will articulate and delineate accountability across an ADI, leading to a common and clear understanding of where accountability resides. The statements and the accountability map together can be used to put a spotlight on areas of potential complexity – such as points of handover in accountability – that may need to be addressed so as not to leave gaps or ambiguity.
APRA expects the individuals identified as accountable persons to be closely involved in the development of their accountability statement – to understand and accept the areas of accountability – and at the time of registration an accountable person will sign their statement to this effect.


The final element of BEAR that I will comment on is remuneration. BEAR requires a minimum portion, most commonly 40 per cent, of an accountable person’s variable remuneration to be deferred for a minimum period of four years. It also requires ADIs to have remuneration policies that provide for the reduction in variable remuneration should an accountable person fail to meet their obligations, and for ADIs to exercise this provision should circumstances warrant it.
I note two aspects here that will be relevant from some smaller ADIs. These remuneration requirements only apply where variable remuneration is actually awarded (and there is certainly no obligation to institute variable remuneration if you do not already have it!), and there is an exemption in the legislation where the amount of the deferred remuneration is less than $50,000.

Next steps

APRA commenced industry engagement on BEAR immediately after the legislation was passed, and has discussed BEAR with COBA and other industry associations on a number of occasions. Initially our focus was naturally on the large ADIs with the earlier implementation date. APRA now looks forward to actively engaging with the ADI sector more broadly on this important development. We anticipate that COBA will play a vital role in the successful implementation of BEAR.
APRA will shortly write to ADIs that will be subject to BEAR from 1 July 2019 requesting submission, in the coming months, of an initial draft list of accountable persons and draft accountability statements. APRA will provide feedback on these drafts to help prepare for formal submission as 1 July 2019 approaches.
The Information Paper released last week is expected to be a highly useful document with these preparations, though I remind you that the obligations are set out in the Banking Act, not the Information Paper, so the two are best read in conjunction.
When planning for implementing BEAR we encourage you to not think of it as a one-off exercise – it is the start on a new, ongoing regime. This means there will be maintenance over time – for example when there are changes of senior staff or reallocation of responsibilities. This also means there is opportunity for the benefits mentioned earlier to be enhanced and built on over time.
Finally, without detracting from the effort required to implement BEAR, I emphasise it is a proportionate regime – most evidently in the numbers of accountable persons, the size of potential penalties, and the remuneration requirements.
Thank you again to COBA for inviting APRA here today and thank you for your attention.  I am very happy to take any questions you may have.



1. Information Paper: Implementing the BEAR

The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. APRA currently supervises institutions holding $6 trillion in assets for Australian depositors, policyholders and superannuation fund members.